How to vastly improve your portfolio: A real-life case-study

Following Medallion Financials recent Livewire education piece “How to transform your portfolio” , I thought this Wire would be worthwhile in order to add further detail and clarity to the discussion. 

In this piece, I will try and shed light on how an investment advisory firm such as Medallion can help clients transform legacy portfolios to potentially deliver stronger returns for clients.

To be clear investment advisory firms are not financial planners and differ from managed funds as well. Where financial planners take a holistic view of client affairs, at Medallion we are specialists in the stock market only and therefore help clients manage their equity portfolios and navigate the ebbs and flows of the equity market.

Unlike managed funds, our service tends to be a higher touchpoint service in that we speak to clients at regular intervals through the year, as well as being to a degree more transparent in that clients know exactly what they are invested in at any given moment in time.

Client accounts are held separately under a client’s name, while shares holdings sit under a HIN.

Given our service is positioned more towards those investors who prefer to be more hands-on, our role is to provide clients with well-researched investment opportunities.

 When we speak with clients we explain the business, and outline the reasons why we like the opportunity, the upside potential and acknowledge the expected downside risks. If the client likes the sound of the opportunity, they can make a decision to buy the company. If they wish to proceed, they provide their consent to us to proceed and buy the company where we go ahead and place the trade on the clients’ behalf. Alternatively, if the client does not like the opportunity and feels the opportunity is not for them, they can simply turn it down. In short:

• We never tell the client they must buy or sell something, or that it is in their best interest to buy/sell something. We simply outline our reasoning for our preference and let the individual use the information to make a decision.
  
  
• Our mission is to help clients minimise any risks that could be detrimental to the performance of their portfolio and to help investors identify new opportunities and investment ideas that could help deliver superior outcomes over time.

Below we breakdown a real-life example to demonstrate how our services can effectively benefit clients. Although many clients and indeed the audited model portfolios have performed better over the period, we feel it gives a good reflection of services and highlights an approach that investors might find useful.

A Real-Life Example

Original Client Portfolio

Client Start Date: 13/06/2019

Portfolio Value: $1,200,254.33

As we can see below from the client’s original top seven holdings, which make up 74.32% of the portfolio, the client originally held a very consolidated portfolio. There was also a significant overweight position in NAB which had a 24.41% weighting and an overall weighting in banks shares of 47.12%.

From our perspective, it is not uncommon to see portfolios with 40-60% exposure to just the big four banks. If you had held banking shares for the last 30 years, and those share prices and dividends had increased over the years with only a few hiccups, one can understand the sentimentality and attractiveness these names carry in the minds of investors. This, of course, does not necessarily make that thought process right. Carrying such a heavy weighting towards any sector of course concentrates the portfolio risk.

It must be remembered that most investors when investing on the ASX are aiming for an exposure to Australian shares, not namely Australian Banking Companies.

Often such concentrated positions are not done by design, rather are a symptom that occurs over time as a handful of positions perform very strongly, whilst others fall by the wayside. With that in mind share investors, as with all investments, still need to overcome familiarity bias and focus on the future; what is to come, rather than what has happened in the past.

Original Client Portfolio: Sector Weightings

Below is a table breaking down the sector weightings of the client’s original portfolio. What is clear is that there is a preference for older world traditional sectors such as Energy, Materials, industrials and of course financials. On the same token, there is a noticeable absence of healthcare stocks and only smaller weighting to Technology.

It is worth considering an investment in the Financial sector (ex-AREITs) would have generated returns of 96% over the past ten years. Meanwhile, an investment in healthcare or tech - two of the best-performing sectors of the decade - would have rewarded investors a handsome 503% and 335%, respectively.

As you can see from those figures’ investors have to always be thinking about how they’re going to evolve their portfolio and how they are going to make sure that they’re exposed to the new age growth areas because that's where you can often generate some good returns.

Original Client Portfolio: Style Weightings

Another interesting observation we often make with new clients is that they will often have a strong preference for a certain style of company. Although in this example there’s a clear preference for value names, we just as often see portfolios stacked heavily with high growth names which we believe can be equally fraught with danger should the tide turn as it has recently for example.

To give things more context value names underperformed growth by 10% or more in 2017, 2018 and 2019. During 2020 value stocks fared much better ending the year underperforming growth by less than 1%, even despite a final December quarter where value outperformed growth 18%, the third-best quarter since 1975.

Our view is that investor should perhaps consider taking a more style neutral approach as well as being more malleable and aware of these shifts in market dynamics. Some would argue that paying the right price or valuation for a growth company is value.

With many market-darlings priced for perfection we are of the belief the drivers of the market could well continue to evolve towards cyclical or economically sensitive stocks that will benefit from the COVID-19 reopening phase however you can never know for certain, hence why maintaining decent exposure to both growth and value makes sense.

Turning our attention from the past and to how the portfolio has been evolved over time. To make it clear it is not our job to butt heads with the clients, rather it is to open their eyes and bring their attention to other areas of the market that they might not have considered themselves.

Current Client Portfolio: Portfolio Weightings

Looking at the top 7 holdings that the client held at the time of writing, you how the names have changed, and how the weightings in each name have become more balanced. 

You will also notice some more commonly held names such as WBC, CSL and MQG, as well as some smaller more growth names such as ALC and PME, while HMC is a property exposure introduced into the portfolio as an opportunistic play during the depths of the COVID crisis. Some would argue that the likes of PME and ALC are too small or too volatile to have such large weightings in and overtime we would tend to agree, however in the short term our view is that it is favourable to let one’s winners run provided the news flow remains positive and cut losers relatively early rather than willing and hope for them to come back.

As you can see from the table one of the client's biggest holdings was a company called Deep Yellow (ASX: DYL), which is a uranium energy company. This is not typically a business that we would hold for clients. But on this occasion the client wanted to hold it, they had high conviction in that company for their own reasons. And over time it is actually done quite well for them.

Ultimately, it is the client's portfolio, it is the client's money, the account is set up under their own name. They are the ultimate decision-maker. So, if they don't want to do something for whatever reason, that's fine which highlights a difference in services offered by someone like Medallion and a Managed fund.

Current Client Portfolio: Sector Weightings

As you can see from the client’s current sector exposures the balance and number of exposures have changed when compared with the original portfolio. There is now a greater focus on new-age sectors such as healthcare and technology, and a reduction in exposure to financials and more specifically bank shares.

By broadening the sector exposures as well as the number of stocks in the portfolio, we feel it reduces the client’s concentration risk, as does reducing the weighting concentrated in the top 7 holdings.

Current Client Portfolio: Style Weightings

When looking at the style weighting readers will notice the change in the weightings with an increased the exposure to growth, which leaves the portfolio a more style neutral balance, in our view better reflecting the market conditions and machinations currently confronting equity investors.

Performance: Comparing the Difference in Outcomes

Looking at the below table calculated using Sharesight you can see the range of potential outcomes the client may have faced.

As you can see that the client’s performance having taken on many of the Medallion recommendations has enabled them to deliver a 19.74% p.a. return after fees and brokerage. This compares very favourably to what the client would have achieved if they had decided to stick with the original legacy portfolio, and indeed should the client have opted to take a completely passive approach and purchased an ASX 200 ETF. 

It is worth touching on the fees and brokerage which in this instance amounted to 1.56% p.a. of the total portfolio value, an amount not too dissimilar to those fees charged by a managed fund but without ever having to incur performance fees.

The value-add of $266,990.05 just goes to demonstrate how much making a few considered decisions on a portfolio can improve an investors respective position, even more so as the years and decades unfold.

Past Livewire articles by Michael Wayne can help give you further detail on Medallions Investment philosophy and approach, and a further sense on how they go about selecting companies in which to invest in.

A personalised approach to investment management

Medallion Financial is a specialist wealth advisory firm, with expertise across a range of domestic and international markets.